Interactive Investor

Edmond Jackson's Stockwatch: Five AIM shares for an ISA

2nd August 2013 00:00

Edmond Jackson from interactive investor

It is all about balancing risk versus the tax break within an ISA. In principle you would pick high risk/reward shares such that even if a few go nowhere, you might own one or two that soar and are tax-free.

In practice and considering the early-stage, often resources-oriented speculative companies that predominate on AIM, it is all too easy to end up with a series of duds and thumping capital loss you cannot then offset against possible gains on other shares you own because an ISA is outside the tax system.

So my selections favour proven businesses on reasonable valuations of their earnings and dividend record; although they should still be regarded as higher risk than benchmark fully-listed shares.

Augean

As detailed in Stockwatch pieces since 2011 and lately on 30 July, cyclical/recovery share Augean, a hazardous waste disposal business, has a proven earnings record and provides essential services; but was hit by the 2008/09 recession and industry confusion surrounding regulations, which stalled contracted revenue and made forecasting tricky.

The company was put on a firm financial level via a £12.2 million (net) equity fundraising in September 2009, plus a £10.0 million credit facility, since when there has been steady progress.

Despite an anticipated second half-year weighting for profits, forecasts are optimistic for 2013 and 2014. With a new chief executive arriving, Augean should be able to benefit from the widespread, if gentle, UK economic recovery. At 38p a share, the prospective yield is under 1% so upside does depend on further earnings recovery.

Cello Group

Marketing services group Cello Group has cited a return to growth for its consumer side, with management citing first-half trading "well ahead of the same period in 2012," hence confidence that full-year expectations will be met. It also entertains the prospect of "ever larger contracts of a more continuous nature," which should help improve the price/earnings (P/E) multiple from about eight times prospectively, at 55p a share.

Downside risk ought to be limited by a 4% prospective yield covered about three times by forecast earnings; and the dividend is supported by strong conversion of profit to cash which is helping debt reduction - although end-2012 gearing was only in the order of 13%.

So the financial profile is robust, but the market is rating it cautiously. I have commented in more detail here.

IQE

Shares in advanced semiconductor materials group IQE halved from 36.5p to 18p this year amid fears about potential competition and whether the smartphone boom will last - wireless devices accounting for about 80% of IQE's sales, it being the leading global supplier of wafers with a 50% to 60% market share.

AIM shares for an ISA - basic financial statistics
CompanyMarket cap (£million)P/E (x)Yield (%)Net asset value (p)
Augean38.411.40.9049.1
Cello45.97.7479.9
IQE1659.0015.3
Majestic Wine32916.83.50135
Polar Capital33115.95.3065.2
P/E and yield based on 12-month rolling forecasts; net asset value per share includes intangibles.

Yet the fears are not supported by trading statements or forecasts, which remain bullish. In April and May, analysts anticipated a near doubling in earnings per share this year as IQE starts to see rewards from a two-year investment programme.

With 646 million shares in issue this implies just over 2p of earnings this year and continued strong growth in 2014 to about 3.4p; hence a current share price of 25p implies a forward P/E multiple of about nine times.

The prospective P/E may be lower if upgrades follow a 24 July update for the first half of 2013, which cited performance ahead of expectations with revenues near £63 million, operating profit over £10 million and net debt below £39 million.

The wireless division has helped achieve revenue growth over 80%, driven by ever-more sophisticated smartphones and tablets, also dual-band wifi. Last April the senior non-executive director bought 215,000 shares at 23.25p and at this current price range there is a fair chance the risks are priced in. As a pure capital growth play there is no dividend, so beware - this likely contributes to volatility.

Majestic Wine

Shares in specialist wine retailer Majestic Wine have traded in a sideways range of about 300p to 500p over the last two years, as earnings growth rates appeared to moderate; and the forward P/E multiple is still in the mid to high teens, about 17 times.

Preliminary results for the year to 1 April 2013 showed relatively flat sales, although to some degree this reflected an intended reduction in wholesale business and the lack of a boost from royal jubilee celebrations this year.

Management is taking initiatives to extend its market leadership via new stores, business customers, online sales and fine wine. Customer numbers have increased nearly 10% to 624,000, sales of wine priced at £20 and above have risen 9.4% and online sales are up to 234,000 offsetting a 7% fall in the average value of an order, to £134. With 193 stores currently, the aim is for 330 nationally.

Majestic's track record and the high number of affluent people unaffected by economic slowdown means it can have a good long-term future - succeeding where Oddbins failed to harness the British love of good wine.

Dividend growth is forecast in the order of 10-13% these next two financial years implying a prospective yield of about 3.5%, which begins to limit downside risk.

Polar Capital Holdings

Shares in investment-management group Polar Capital Holdings have enjoyed a bull run based on strong growth in earnings since 2010 - obviously helped by the turnaround in financial markets post the 2008/09 crisis. At 400p currently, the P/E multiple is about 17 times projected growth in the year to end-March 2014, anticipated at 78% then moderating to 24% in 2014/15, whereupon the P/E would be about 14 times.

Operational gearing of a successful investment management firm looks to be kicking in, with June preliminary results showing a 42% increase in assets under management, to $7.2 billion (£4.7 billion), and net inflows every quarter.

The group is well-diversified in terms of exposure, although would still see downgrades if stockmarkets hit turbulence for a while. The downside ought to be limited however, considering a prospective yield of 5.3%, albeit with fine (forecast) earnings cover of 1.2 times.

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